Friday afternoon the markets received a second dose of “constructive news” as the twitter was filled with noise about a phone conversation between Chancellor Merkel and President Hollande. The German and French leaders confirmed that everything possible would be done to save the EURO. The EURO rallied strongly at first but after further thought retreated to basically unchanged from Thursday.
The EURO POLITICIANS seem to have gotten behind Draghi’s comments, “THAT EVERYTHING WILL BE DONE.” Adding to that was another phone call over the weekend between Merkel and Italian PRIME MINISTER Monti–rest assured that everything will be done. Again, EVERYTHING WILL BE DONE. Then, the great LIAR OF LUXEMBOURG, PRIME MINISTER JEAN-CLAUDE JUNCKER, added in an interview that the ECB/EFSF would “act together” to reduce borrowing costs. To end the weekend news cycle, German FINANCE MINISTER SCHAEUBLE DENIED REPORTS THAT ECB WILL BUY SPANISH GOVERNMENT BONDS IN A BIG WAY.
It was Schaeuble that lit the fire last week by stating that the market was wrong in its valuation of Spanish debt. Why was it Schaeuble? The questioning of the market’s valuation of Spanish bonds gave ECB PRESIDENT DRAGHI THE COVER TO GET AGGRESSIVE ON THE NEED FOR MASSIVE ECB LENDING TO THE SOVEREIGN DEBT MARKETS. In his market rousing speech on Thursday (5:00 a.m. CST)), Draghi stated: “To the extent that the size of these sovereign premia hampers the functioning of the monetary policy transmission channel, they come within our mandate.” Draghi continued, “WITHIN our mandate the ECB is ready to do whatever it takes to preserve the EURO. AND BELIEVE ME IT WILL BE ENOUGH.” In a very significant way Mario Draghi changed the entire nature of the ECB mandate, but of course he had FM SCHAEUBLE set the table for him by proclaiming that markets were incorrectly valuing the SPANISH DEBT.
As I pointed out on Wednesday, the SPANISH 2/10 CURVE WAS CRITICAL AND I ADVISE GOING BACK TO WEDNESDAY’S BLOG TO EXAMINE THE BLOOMBERG CHART OF THE 2/10 CURVE. When the curve dropped to pre-LTRO 1 levels, 80 BASIS POINTS, the ECB and EUROCRATS became worried that the curve flattening was indicative of Spain’s failure to sell even short-term debt. By FRIDAY’S close, the 2/10 SPANISH CURVE RALLIED TO 161 BASIS POINTS, a considerable move for a developed country yield curve.
The curves in Europe are going to be significant indicators for us as we try to analyze ECB intentions. The steepening of the curve led to a major rally in all risk on variables. However, the EURO RALLY WILL BE SUSPECT IF THE ECB BECOMES OVERLY PROMISCUOUS IN ITS BOND BUYING!
***POSSIBLE KEY DEVELOPMENT: OVER THE WEEKEND IT WAS ANNOUNCED THAT U.S. TREASURY SECRETARY GEITHNER WAS GOING TO MEET WITH ECB PRESIDENT DRAGHI AND GERMAN FM SCHAEUBLE ON MONDAY IN GERMANY. First Geithner will meet Schaueble in Sylt and later meet with Draghi in Frankfurt. This meeting is without Bernanke so I am thinking that Geithner is going to press the EU powers to do all they can to stem the crisis for the short-term so as to stabilize the markets and hopefully remove some of the angst that is destroying global financial confidence.
BUT GEITHNER BETTER BE BRINGING SOMETHING TO EASE EUROPEAN CONCERNS ABOUT THE U.S. FISCAL CLIFF, which is causing a drag on the global economy and business confidence. If GEITHNER IS COMING ONLY TO LECTURE THE EUROPEANS, THIS WILL BE A WASTED TRIP. I THINK GEITHNER WILL LET THE EUROPEANS KNOW THAT BY DOING ALL THEY CAN TO EASE THE CRISIS, OBAMA WILL BE PUTTING FORTH A REAL DEAL ON HEADING OFF THE LOOMING FISCAL CRISIS. IT WILL BE A SHOW OF LEADERSHIP FROM AN ADMINISTRATION STRUGGLING UNDER THE IMAGE OF FAILING TO TAKE THE LEAD ON THE FISCAL CLIFF ISSUE.
Look for something big as FRIDAY’S STOCK MARKET RALLY WAS MUCH TOO STRONG TO BE A SECOND DAY OF SHORT COVERING ON THE WORDS OF JANUS-FACED EUROPEAN LEADERS. TIM, THERE HAD BETTER BE SOMETHING BIG OR THE MARKETS WILL EXACT A STEEP PRICE FOR EMPTY CONCEPTS. This week will be very volatile-especially as we have the ECB, FED and the BOE, as well as unemployment FRIDAY. There goes my vacation.
***A major opinion piece in today’s Financial Times by OTMAR ISSING. Read the article, “Europe’s Political Union Is An Idea Worthy of Satire.” Mr. Issing is one of the powerhouses of German and European Central Banking and his words carry great weight in Germany. It is an article that is a must read for all Europe followers.
In the article he states:
“The implicit transfer of taxpayers’ money would be a violation of the fundamental democratic principal of no taxation without representation. This is true for all forms of debt mutualization. This is hardly the proper way to create a democratic EU.” Also, Herr Issing seems to be offering Tim Geithner some advice … “And it is more strange when foreign politicians and experts are pressing eurozone states to give up national sovereignty, out of fear that a collapse of monetary union might have severe consequences for their economies.”
Let us hope that Geithner has a great deal in his pocket and not just speeches and plans for the EUROPEANS. The GREAT GAME IS ON … lots of voices to be heard.
Tags: BOE, Draghi, ECB, Euro, Fed, Germany, Hollande, Juncker, Merkel, Schaeuble, Spanish 2/10 curve, Timothy Geithner, U.S. fiscal cliff
July 30, 2012 at 1:51 am |
Growth rates and actual production outputs are just minor details as throwing money into the system to turn things around, eventually, is the main objective and the US has this wonderful template of zero money costs to and for central banks, where in turn the central banks charge everyone else interest. Of course I over simplify everything…don’t I??
In a perfect world there never seems to be a shortage of debt paying slaves.
July 30, 2012 at 5:35 am |
I’M not: no you have it.Until the “output gap” disappears –it is zero interest rates as far as the eye can see.Debt crisis is not in the vernacular of those who slayed the business cycle–but let the global balance sheet recession is a real phenomenom
July 30, 2012 at 9:58 am |
Little Tim will be whispering into to Draghi and Schaeuble ears the equivalent of Obama’s quiet message to Medvedev that he would have “more flexibility” after November 6. Making sure the boat is not rocked until that time. Unsettled markets in September 2008 sealed the election. Making sure a Spanish bank doesn’t follow the same route as Lehman.
July 30, 2012 at 2:05 pm |
I understand and agree w/ your point that Lil’ Tim best come armed w/ something substantial other than platitudes. Outside of backstopping Germany however, what meaningfully can he bring in your opinion? Even backstopping Germany wouldn’t solve anything although it might suffice as a substantial kicking of the can.
July 30, 2012 at 2:28 pm |
GOOD CAPTAIN–that is the penultimate question —the Europeans have been angered by the U.S. fiscal situation so at least some leadership on the fiscal cliff—again I urge a reading of Otmar Issing’s piece in the FT.The Europeans understand that this isa U.S. election year and the Obama team is evidently searching for something positive–or maybe the U.S. to acquiesce to a Lagarde effort from the IMF .Yes Congress will balk but a huge IMF package may buy everybody some time.Again,the IMF gold hoard can be used as collateral for a massive EUROBOND/IMF bond bailout.I know it is farfetched but there isan election at stake—think Nixon and the first dollar devaluation.Election politics bring interesting ideas